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Overly generous severance payments, reached under compromise agreements, may be legally invalid, the law firm Eversheds has warned.

In a briefing to the sector, lawyers point out that in April the High Court overturned a compromise agreement between a National Health Service trust and its chief executive. The court said Rosie Gibb was not entitled to a £250,000 severance payment even though Maidstone and Tunbridge Wells NHS Trust had signed a compromise agreement. The judge held that the agreement was "irrationally generous" and fell outside the powers of the trust.

Eversheds says: "Although the case involved an NHS trust, it is relevant to education institutions, which are also subject to restrictions on the way public funds are used."

The main problem with Ms Gibb's deal was that the level of compensation far exceeded the maximum that any tribunal could have awarded had she simply been dismissed. "Had there been a dismissal, the very most the trust could have been ordered to pay in compensation would have been approximately £145,000, made up of a sum to represent the contractual period of notice, together with a sum equivalent to the maximum compensation that could have been awarded for unfair dismissal," the law firm says.

Some recent departures from the sector "may be picked over as a result of this decision", it warns. "Education institutions contemplating severance payments in excess of statutory or contractual entitlements should prepare a business case demonstrating how the settlement represents value for money and is in the public interest," the firm advises.

Out, but not out of pocket

Controversial severance arrangements reached in 2009 include that of Stephen Hill, principal of Royal Holloway, University of London, who stepped down at the end of July but will continue to receive his full salary during a two-year sabbatical before he retires in 2011.

After Brian Roper stood down as vice-chancellor of London Metropolitan University in March, following the withdrawal by funding chiefs of more than £36 million in over-paid teaching grant, the Department for Innovation, Universities and Skills queried his severance terms. The Higher Education Funding Council for England told it: "This is a matter for the university board although we were assured that our guidance on severances was complied with. Informally we understand that (the vice-chancellor) received no payments above his contractual entitlement."

Hefce's guidance, issued earlier this year, says university managers and governing bodies must be "fair and equitable" when deciding staff severance payments. It says: "When a severance arises following poor performance on the part of an individual, any payment should be proportionate and there should be no perception that poor performance is being rewarded." It adds that confidentiality agreements should be the exception, not the norm.